Understanding Economics: The Basics and Real-World Applications

1. What is Economics? Source: Centre Productions, United Learning Inc. Accessed from http://www.glynn.k12.ga.us/~pgalland/gembit/fifthsocial.html

2. Summary • Introduction • Economic Activity • Monetary Policy • Fiscal Policy • Summary

3. What is Economics? • Social science concerned with the production, distribution, exchange, and consumption of goods and services • Focused on the way individuals, businesses, and governments seek to achieve economic objectives • Other fields of study also contribute to this knowledge • Psychology, Ethics, History, Sociology, Politics

4. Schools of Economic Thought:A Brief Overview • Classical Economics • The dominant theory throughout 18th and 19th centuries • Principle Belief: pursuit of individual self-interest will in turn benefit the society the most as a whole • Primarily non-regulatory • “Invisible Hand” • Laissez faire • Economic equilibrium

5. Schools of Economic Thought:A Brief Overview • Marxist • Drawn from Classical economic assumptions • Labor Theory of Value • Value of goods and services is dependent on the value of the labor that produces them • Predicted the collapse of capitalism

6. Schools of Economic Thought:A Brief Overview • Keynesian Economics • A response to Classical theory • Dominated 30 years after WWII (Bishop, 148) • Contends that market economies are not self-regulating • Government interaction is necessary to stabilize economy • “Active government”

7. Schools of Economic Thought:A Brief Overview • Neo-Classical • Developed in 1970s and 1980s from the Classical model • Response to Keynesian Economics and the rising inflation of the 70s • Revival led by the Chicago School (Milton Friedman) • Assumes that prices and wages will adjust rapidly enough that “price-wage equilibrium” always exists

8. Microeconomics • The “worm’s eye view”(Heilbroner and Thurow) • How buyers and seller behave in the marketplace • Focuses on economic behavior of a household or firm • Includes: pricing, distribution, investment, supply and demand, market failures

9. Macroeconomics • The "bird's eye view" (Heilbroner and Thurow) • The "analysis of prosperity and recession" (Heilbroner and Thurow) • Includes: National income, total consumption, investment, money supply, growth, inflation, unemployment

10. Understanding Economic Activity Supply & Demand • In a competitive / free market, the interaction between the demand for and the supply of goods and services determines the prices charged for the goods and services Business Cycle • Expansion in many types of economic activity followed by contractions in economic activity • Economic Indicators shed light into business cycles

11. Economic Indicators • Leading Economic Indicators • Unemployment, stock market prices, issuance of building permits, consumer expectations (sentiment) • Index of Leading Indicators • Index of items that generally swing up or down before the economy as a whole does • Lagging Economic Indicators • Prime interest rate, average length of employment, changes in prices of services • Index of Coincident Indicators • Measure of current condition of our economy

12. Understanding Prices • Inflation • General upward movement of prices of most goods and services • Results from price increases that do not correspond to improvements in quality • Measures of Inflation • Consumer Price Index (CPI) • CPI-U (Urban workers) • CPI-W (Wage/clerical workers) • Producer Price Index (PPI)

14. Monetary Policy: A few important terms • Currency • Money • Interest rate • Monetarism

15. What is monetary policy? • Basically, it is the way a nation's central bank controls how much money is in the economy • In the United States, the Federal Reserve Board sets monetary policy • There are three ways to set monetary policy

16. Federal Reserve System • Has 7 members who are appointed to 14 year terms by the President and confirmed by the Senate • Board of Governors is chaired by Allan Greenspan • Sets monetary policy and oversees the U.S. banking industry • Regulates consumer credit industry • Oversees national check-clearing systems • Twelve Federal Reserve districts which each have a Federal Reserve Bank

17. Three ways of setting monetary policy • Open market operations • Reserve requirements • Discount rates

18. Key Resources • Print • Ferris, Ken and Mark Jones. The Reuters Guide to Official Interest Rates 2nd ed. London: Probus Publishing, Co., 1995 • McCusker, John. How Much is That in Real Money?: A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States 2nd ed. Worcester, MA: American Antiquarian Society, 2001.

19. Key Resources • In Plain English: Making Sense of the Federal Reservehttp://www.stlouisfed.org/publications/pleng/

20. Key Resources • Federal Reserve websites have a wealth of information • Federal Reserve Bulletin http://www.federalreserve.gov/pubs/bulletin/ • Fed in Print http://www.frbsf.org/publications/fedinprint/index.html • Publications and Educational Resources http://www.federalreserve.gov/publications.htm

21. Key Resources • FRED II: Economic Research from the St. Louis Fed http://research.stlouisfed.org/fred2/ • Federal Reserve Statistics: Releases and Historical Data http://www.federalreserve.gov/releases/

22. Fiscal Policy • Use of taxation and government spending to influence the economy • Types • “Easy” fiscal policy • “Tight” fiscal policy

23. Fiscal Policy • Outgrowth of Keynesian macroeconomics • Prior to the Depression, budgets tended to be balanced and small • Depression led economists to consider the use of policy to instigate economic recovery • The basis for the Employment Act of 1946 • called for “the Federal Gov’t to use all practical means…to promote maximum employment, production, and purchasing power.”

24. Fiscal Policy: Key Terms • Budget • Budget deficit • Deficit spending • Budget surplus • National Income Accounting • GDP • GNP • Inflation • Recession